Petrobras Strikes Impacting up to 500k b/d of Brazil’s Oil Production

A massive pile of debt, falling revenues, and a blockbuster corruption scandal have turned the Brazilian oil company Petrobras into a shadow of its former self. The state-owned company’s failures mean that Brazil has no chance of meeting the ambitious oil production targets it set for the end of the decade.

Petrobras has been forced into taking corrective measures, including large spending reductions and plans to liquidate assets. When these plans were put into place, it was unclear if they would put the Brazilian company on sound financial footing, but now a new crisis is brewing that could present further setbacks for the Brazilian giant, as labor disputes threaten to create a meaningful supply disruption.

Oil workers resist asset sales

After three months of failed negotiations, Brazil’s largest oil workers union initiated a strike on November 1 to protest the company’s proposed asset sales, which the union sees as a plan for privatization and large-scale job losses. Union members also seek higher wages, a point on which Petrobras has shown willingness to negotiate. But there is not much in the way of common ground on asset sales, which Petrobras sees as an unavoidable necessity at this stage.

After the collapse of oil prices and the vast corruption scandal, the embattled company had no choice but to come up with a plan to right the ship. Petrobras is the most indebted oil company in the world, a problem that has mushroomed over the past year as oil prices collapsed and the company is beset with corruption charges.

Petrobras is the most indebted oil company in the world.

The company’s plan for the next five years relies very heavily on downsizing. Petrobras proposed $15.1 billion in asset sales for 2015 and 2016, plus an additional $42.6 billion in 2017 and 2018. In early October, Petrobras also issued another downward revision to its projected capital investment program, cutting spending from $28 to $25 billion for 2015, and from $27 to $19 billion in 2016.

Supply impacts

None of this bodes well for the thousands of workers who fear job losses. The November 1 strike involves an array of unions under the banner of the Oil Workers Federation (FUP), consisting of platform and refinery personnel. The Petrobras strikes have impacted facilities across the country, stretching from Rio Grande do Norte in the northeast to Rio Grande do Sul in the south.

So far, Petrobras is downplaying the strike, saying that “distribution is functioning within normal limits and there is no forecast of a market shortage.” Still, the company said it was “evaluating the impact” and was “taking all necessary measures to maintain production” at platforms and refineries affected by the strike.

The union has taken a different tone. FUP says that the strike has shut in production at a long list of Petrobras’ facilities, so far affecting at least 450,000 barrels per day of oil production. Data is spotty, so the number should be taken with a grain of salt—FUP has some incentive to portray an outsize impact.

FUP says that 47 out of 55 platforms in the Campos basin are experiencing work stoppages. Of the 47, FUP says 31 are completely paralyzed.

But that doesn’t mean the union is all bark and no bite. FUP announced on November 4 that 47 out of 55 platforms in the Campos basin are experiencing work stoppages. Of the 47, FUP says 31 are completely paralyzed. The Campos basin is the core of Petrobras’ production base, responsible for about 70 percent of Brazil’s oil output. The longer the strike lasts and the more it spreads, the more damage will be done to Petrobras.

The effect on the country’s pre-salt platforms is unclear at this time. Oil production from the pre-salt hit a record high 1.12 million barrels per day (mbd) in October.

More pain at a bad time for Brazil

Petrobras saw its credit rating downgraded by S&P in September to junk status. The financial pressure will only climb in the near-term. On November 3, Moody’s cited the $24 billion in maturing debt in 2016 and 2017 as a looming problem for Petrobras. “We believe that Brazilian banks’ ability to continue to lend to Petrobras has declined and that the company will have to maintain strong liquidity in a context of a weak Brazilian economy, volatile oil prices, difficult prospects for asset sales and political uncertainties,” Moody’s Vice President and Senior Credit Officer Nymia Almeida said in its note.

“Petrobras cut its capital spending plans for the next four years to protect its cash, but starting in 2017 this strategy will hurt the company by limiting production growth.”

Petrobras is facing a catch-22. It desperately needs to cut spending to reduce debt, but that approach will also slash future production, and thus hamper the company’s long-term revenues. “Petrobras cut its capital spending plans for the next four years to protect its cash, but starting in 2017 this strategy will hurt the company by limiting production growth,” Almeida said. In June 2015, the company admitted as much, lowering its forecast for oil production to 2.8 mbd in 2020, down from a previous estimate of 4.8 mbd. Petrobras produced 2.13 mbd in September.

To make matters worse, the sharp devaluation of Brazil’s currency, the real, is a further drain on the company, as it needs to import refined fuels to meet domestic demand, purchases that are made in dollars. If the real falls by 25 percent, for example, it “would reduce the company’s EBITDA by half,” according to Almeida.

Now, the solution that Petrobras has come up with to fix its rather dire financial predicament—asset sales—has run into stiff opposition by the thousands of workers that it employs. The strike could exacerbate these financial troubles if supply disruptions persist. According to the Rapidan Group, Petrobras could use contingency crews to maintain production at its facilities, but that may only buy the company two weeks or so before the “system becomes strained.”

Obviously, a lot depends on how long the workers decide to extend the strike. Production will bounce back relatively quickly after the workers and Petrobras can reach a compromise. However, even if Petrobras can convince the unions to end the strike, it still faces a very long and uncertain road to recovery.

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The Fuse is an energy news and analysis site supported by Securing America’s Future Energy. The views expressed here are those of individual contributors and do not necessarily represent the views of the organization.

Issues in Focus

Safety Standards for Crude-By-Rail Shipments

A series of accidents in North America in recent years have raised concerns regarding rail shipments of crude oil. Fatal accidents in Lynchburg, Virginia, Lac-Megantic, Quebec, Fayette County, West Virginia, and (most recently) Culbertson, Montana have prompted public outcry and regulatory scrutiny.

2014 saw an all-time record of 144 oil train incidents in the U.S.—up from just one in 2009—causing a total of more than $7 million in damage.

The spate of crude-by-rail accidents has emerged from the confluence of three factors. First is the massive increase in oil movements by rail, which has increased more than three-fold since 2010. Second is the inadequate safety features of DOT-111 cars, particularly those constructed prior to 2011, which account for roughly 70 percent of tank cars on U.S. railroads. Third is the high volatility of oil produced from the Bakken and other shale formations, which makes this crude more prone towards combustion.

Of these three, rail car safety standards is the factor over which regulators can exert the most control. After months of regulatory review, on May 1, 2015, the White House and the Department of Transportation unveiled the new safety standards. The announcement also coincided with new tank car standards in Canada—a critical move, since many crude by rail shipments cross the U.S.-Canadian border. In the words DOT, the new rule:

Since the rule was announced, Republicans in Congress sought to roll back the provision calling for an advanced breaking system, following concerns from the rail industry that such an upgrade would be unnecessary and could cost billions of dollars. The advanced braking systems are required to be in place by 2021.

Democrats in Congress have argued that the new rules are insufficient to mitigate the danger. Senator Maria Cantwell (D-WA) and Senator Tammy Baldwin (D-WI) both issued statements arguing that the rules were insufficient and the timelines for safety improvements were too long.

The current industry standard car, the CPC-1232, came into usage in October 2011. These cars have half inch thick shells (marginally thicker than the DOT-111 7/16 inch shells) and advanced valves that are more resilient in the event of an accident. However, these newer cars were involved in the derailments and explosions in Virginia and West Virginia within the past year, raising questions about the validity of replacing only the DOT-111s manufactured before 2011.

Before the rule was finalized, early reports indicated that the rule submitted to the White House by the Department of Transportation has proposed a two-stage phase-out of the current fleet of railcars, focusing first on the pre-2011 cars, then the current standard CPC-1232 cars. In the final rule, DOT mandated a more aggressive timeline for retrofitting the CPC-1232 cars, imposing a deadline of April 1, 2020 for non-jacketed cars.

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DataSpotlight

The recent oil production boom in the United States, while astounding, has created a misleading narrative that the United States is no longer dependent on oil imports. Reports of surging domestic production, calls for relaxation of the crude oil export ban, labels of “Saudi America,” and the recent collapse in oil prices have created a perception that the United States has more oil than it knows what to do with.

This view is misguided. While some forecasts project that the United States could become a self-sufficient oil producer within the next decade, this remains a distant prospect. According to the April 2015 Short Term Energy Outlook, total U.S. crude oil production averaged an estimated 9.3 million barrels per day in March, while total oil demand in the country is over 19 million barrels per day.

This graphic helps illustrate the regional variations in crude oil supply and demand. North America, Europe, and Asia all run significant production deficits, with the Middle East, Africa, Latin America, and Former Soviet Union are global engines of crude oil supply.